Economic Crime and Corporate Transparency Bill

Committee (2nd Day)

Clause 54: Filing obligations of micro-entities

Amendment 45

45: Clause 54, page 38, line 40, at end insert— “(6) Electronic documents delivered to the registrar under this section must comply as to accuracy, completeness and consistency with the registrar’s requirements.”Member’s explanatory statement This amendment creates an obligation for documents delivered to satisfy the registrar’s requirements as to digital formatting.

My Lords, I confess that these amendments essentially offer me another bite of the cherry because they are almost exactly the same as amendments that appeared last time in respect of non-micro accounts, but for completeness I had to put them in here again to cover micro-companies. That was fortuitous because, given that the Minister so eloquently batted away my amendments last time, this gives me another opportunity to make pretty much the same case.

Completeness is defined in Sections 444 onwards of the Companies Act—for example, the balance sheet that was signed by the directors—but the Act and this Bill say nothing about tagging that information. It says that the registrar can require an electronic format, but the legislation does not really tell us what completeness means; in particular, electronic completeness and the area I highlighted, which is inconsistencies within the accounts. For example, an oligarch is a director of a company and his name quite correctly appears on the accounts, but that name has not been tagged or it has been tagged as something other than the director’s name so when one searches for that name, it will not be found; so not tagged means it is not complete or tagged wrongly means that it is not self-consistent. It is no good accountants arguing that the accounts are complete because the director has been named because if the name has not been tagged, it will not be found. I hope that before Report there will be some focus on this issue for micro- and other accounts to ensure that full advantage is taken of electronic filing so that searches can be made easier and the registrar has the responsibility to make sure that the accounts are correct.

I am minded to speak on my noble friend Lord Sarfraz’s intention to oppose the Question that Clause 54 stand part, which is in this group. I am aware that he is not in his place, but, first, having thought about this for some time and prepared some notes on it and, secondly, to avoid it becoming an issue down the line, I want to make the point that I do not think micro-companies should be excluded. They were not excluded, I think, until about 2013. Micro-company accounts can cover revenues in millions of pounds. There could be a temptation to form a number of micro-companies which in aggregate are quite substantial, so I urge the Minister to allow Clause 54 to stand part. I beg to move.

My Lords, I apologise for not taking part at Second Reading due to other parliamentary commitments. I have a couple of small questions, but one of them is quite important.

First, if we are dealing with micro-companies, they are not likely to have substantial staff. There must be some safeguard so that the authorities do not change the requirements for reporting and leave these poor micro-entities with perhaps two or three months to totally amend their software. That has happened in certain other areas, so there must be some requirement that, while it is quite right that the registrar’s requests should be met, there must be some safeguards and those having to do the returns must be given adequate time to do them.

Secondly, I have one small point in relation to new Section 443A(2) inserted by Clause 54. At the end, it says, “(and any directors’ report”). I assume the directors’ report refers to the accounts, but that is not totally clear.

My Lords, in the light of what we have just heard, I want to touch on the micro-company side of things. Micro-companies may be small but they are not unimportant. They are probably the single biggest sort of company used for VAT fraud, for example. There has been a lot of publicity recently about some poor chap in Cardiff. Several hundred companies were registered at his address, then he started receiving large bills from HMRC. It is precisely this sort of company that is used for that; we should not be too generous to these companies in relation to reporting requirements.

My Lords, I rise to speak to the amendments in the name of the noble Lord, Lord Leigh of Hurley, together with the notice given by the noble Lord, Lord Sarfraz, that he intends to oppose the Question that Clause 54 stand part of the Bill; I suspect that in his absence this will not be part of the process but I will cover the issues that are raised.

I will confine myself to a few observations. First, no one wishes to stifle micro-enterprises with too onerous a set of reporting duties but, in a Bill that has the word “transparency” in its very name, it is surely important that micro-entities are not exempted from such a reporting duty. That small businesses are not merely the flywheel but the very motor of the UK economy is well known and constantly rehearsed. I have no need to go through all that but flourishing surely cannot come at the price of opacity when that opacity will be exploited in the way in which the noble Lord, Lord Vaux, suggests it has been in the past and we know is a problem.

The amendments from the noble Lord, Lord Leigh, do not merely serve as a symbolic recognition of this fact but serve a useful practical purpose, which I will turn to. It is the stated aim of the Government for Companies House to be a fully digital organisation by 2025. The amendments under discussion ensure that electronic documents submitted to the registrar not only conform with its standard electronic format but ensure that they meet standards of accuracy, completeness and consistency. Surely, each of these measures is desirable and, taken together, they are more desirable still.

If the Government are not minded to accept the noble Lord’s amendments, it would be useful to know which of these requirements they regard as superfluous. It would also be helpful to know how the Government feel that these amendments fail to assist Companies House in meeting its own target of becoming fully digital in the next two years, which seems a very challenging target.

My Lords, I just want to come in on the point made by the noble Lord, Lord Vaux, on micro-accounts. It was actually 11,000 companies that were registered to this poor man’s residential address in Wales. It all relates to a new loophole, which has been discovered by foreign traders selling on the internet. Up until Brexit, they were essentially avoiding VAT because there was no real mechanism for HMRC to recover it all around the world but, when we left the European Union, we brought in our own regulations. There is a loophole that if, as in this case, you are a Chinese trader and you register a company in the UK, you do not have to pay VAT through the platform on which you are selling the goods.

HRMC is completely floored by this. In its letter to Meg Hillier, it said simply that it had not recognised any fraud so far. Let us get real. Part of the problem is that it is not getting the data. If it could scrape all the data off those 11,000 company accounts, it would very quickly see the pattern.

There appears to be a chorus of agreement, so I will not add terribly to its length. This is just to thank the noble Lord, Lord Leigh, from whose knowledge of this area we benefit. We should be in a position to listen.

We had a meeting with officials yesterday, and my read-out is that the reason for the government resistance to the previous versions of these amendments referred to by the noble Lord, Lord Leigh, was, in a sense, practical. The accounts are signed off by the board and auditors, and something needs to be done thereafter to tag them. The departmental team seemed worried that something might go wrong in that tagging process, so we should not go down this route.

Having prepared more than 20 company accounts—I concede that they were largely for large businesses—this always happens. The board signs off a set of accounts and then prepares to communicate it in a number of different media. The accounts are put in an annual report, a Stock Exchange announcement system and a website. In each case, there is a process to make sure that the read-across is performed correctly. I suggest that the practical constraint that somebody might do something wrong does not outweigh the benefit of mandating this tagging process across the board.

I agree with the noble Lord, Lord Leigh, and others that micro-companies should still be included in this process.

My Lords, I think the consensus continues. I thank the noble Lord, Lord Leigh, for introducing this group. As he said, this set of amendments really repeats those spoken to earlier, but in this case concerns micro-entities. He made the points about either accidentally or deliberately tagging wrongly, and that not seeming a substantial argument against increasing its use. As the noble Lord, Lord Fox, said, companies are well used to producing and presenting accounts in different media and ensuring that they are presented consistently across them. This tool should extend their use.

I also agree with the noble Lord, Lord Leigh, and others that the Clause 54 stand part debate in the name of the noble Lord, Lord Sarfraz, is not appropriate for the Bill. As others have said, micro-companies are not actually that small. Some numbers have been presented, but the figure I have is that 1.3 million micro-entity accounts were filed in 2019-20, the largest proportion of accounts filed with Companies House. The figures I have are of a turnover of less than £632,000 on a balance sheet of £316,000 with 10 or fewer employees. Over the years, I have been involved in a number of businesses of that sort of size, but they can and do sometimes grow into much larger businesses. There needs to be consistent tracking of these companies to see where they have come from and make predictions about where they might go, so I agree with the point on that made by the noble Lord, Lord Leigh.

Other noble Lords agreed with this point, so I hope that the Minister will resist the argument that Clause 54 should not stand part, if the noble Lord, Lord Sarfraz, chooses to speak to it, and is sympathetic to the amendments from the noble Lord, Lord Leigh.

My Lords, I draw attention to my interests as set out in the register of interests, including as a director and person with significant control at AMP Ventures and as a shareholder of several other businesses and companies. I do not believe I have any personal conflicts represented today.

I also thank all Members of the Committee who participated in our useful and instructive discussions over the past month or so. I am sorry that the Easter break we enjoyed sort of broke our continual discussions, but I hope that we will reinstigate them in the near future. I am fully available over the next few days, particularly before the next series of Committee amendments and over this process, to make sure that the House collaborates together to reform Companies House for the first time in nearly 100 years, and that we bring to bear the crucial reforms that will enable us to have a transparent business environment that allows businesses to flourish and the data that they provide to Companies House to be used more effectively to create greater wealth and private enterprise in this country. I hope that, in my actions, noble Lords see my desire to collaborate very closely with all your Lordships to ensure that we all reach the same end.

I thank my noble friend Lord Leigh of Hurley, whom I described as a “business guru” at the previous Committee meeting he was gracious enough to attend. I understand that he has put this as his screensaver on his WhatsApp group or whatever and, although I am delighted to have boosted his business confidence, we are not here solely for that. My noble friend’s Amendments 45 to 47, which were well supported by the noble Lords, Lord Naseby and Lord Ponsonby, address concerns on the correct formatting of electronic content, which I would like to discuss a little further.

The Government and I agree wholeheartedly with the sentiments behind the amendments, which seek to ensure that the electronic formatting of filings submitted to Companies House is accurate and complete. The amendments are intended to work together to make it a requirement on all companies, irrespective of size, to submit electronic documents consistent with registrar rules. In principle, the philosophy behind that is the whole point of the reforms that we are bringing forward today.

However, the Government—and my team and I—do not feel that these amendments are necessary. Clause 73 amends Section 1068(4) of the Companies Act 2006 so that the registrar can mandate electronic delivery and the electronic format of documents by way of the registrar rules in Section 1117 of that Act. I have the document here and have just confirmed it myself.

Registrar rules already require companies to file digitally and specify the technical requirements to be met in this regard. Companies are obliged to comply with these rules. An additional power in the Bill would duplicate these requirements. As electronic formatting is both a technical and an administrative requirement, it is more appropriately placed in registrar rules than in the legislation. I emphasise the commitment of the Government to ensure that this happens and that there is flexibility in the administration of this process. I ask my noble friend Lord Leigh to withdraw his amendment.